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Takiguchi v. MRI International, Inc.

United States District Court, D. Nevada

July 7, 2014

SHIGE TAKIGUCHI, et al., Plaintiffs,
v.
MRI INTERNATIONAL, INC., et al., Defendants.

ORDER

CAM FERENBACH, Magistrate Judge.

This matter involves a class action securities fraud lawsuit governed by the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 77a, et seq. Before the court is Defendant Edwin Fujinaga's motion to disqualify Plaintiffs' Counsel (#148[1]). Plaintiff Shige Takiguchi filed an opposition (#155); and Fujinaga replied (#162). Also before the court is Fujinaga's motion for an order to show cause why Takiguchi and Plaintiffs' Counsel should not be held in contempt for allegedly violating the discovery stay (#150). Takiguchi filed an opposition (#158); and Fujinaga replied (#165). Also before the court is Defendants' motion to continue the hearing on the pending motions (#167). For the reasons stated below, Fujinaga's motions are denied and the hearing is vacated.

BACKGROUND

Fujinaga's motions argue that Takiguchi violated this court's order staying discovery. For purposes of the motions, the relevant facts include (1) Defendants' alleged Ponzi scheme, (2) the court's orders limiting and staying discovery, and (3) Takiguchi's conduct that allegedly violated the court's orders. Each is discussed below.

I. The Alleged Ponzi Scheme

From approximately 1998 through April 26, 2013, Defendants MRI International, LVT, Inc. d/b/a Sterling Escrow, and their corporate officers, Edwin J. Fujinaga, Junzo Suzuki, and Paul Musashi Suzuki, allegedly orchestrated a Ponzi scheme in connection with the purchase and sale of medicalaccount receivables. (Amend. Compl. (#86) at ¶¶ 1, 3-7, 23).

The medical-account receivables involved in the scheme were purportedly held by U.S. medical providers against insurance companies. ( Id. at ¶ 1). After allegedly buying the receivables from medical providers at a discount, Defendants sold the receivables to Japanese investors on the premise that the accounts were profitable investments that were heavily regulated by American authorities and guaranteed under Nevada law. ( Id. at ¶ 19.)

Plaintffs claims that no medical-account receivables existed. Defendants allegedly used investors' money to pay off earlier investors and fund their own lavish lifestyles. ( Id. at ¶ 2). In the process, Defendants misrepresented the extent of the United States' regulatory oversight and lied to Japanese regulators who investigated the scam. ( Id. ) In the end, Defendants allegedly stole $136.5 billion from approximately 8, 700 Japanese investors. ( Id. at ¶ 30).

The scheme was uncovered in 2013. ( See id. at ¶ 31). Customers reported MRI International to Japan's Financial Services Agency ("FSA"), and complained that MRI International failed to repay on matured investments. ( Id. ) Shortly thereafter, the United States Securities and Exchange Commission became involved. On March 7, 2013, the SEC sent a letter to Defendant Edwin Fujinaga, MRI International's CEO, demanding that "all documents created, received or maintained by MRI be preserved pending further notice from the SEC staff" and that "any procedures for the disposal, removal or purging of MRI documents be suspended." (Def.'s Opp'n (#40) at Exhibit A).

On April 26, 2013, the FSA revoked MRI's license. (Amend. Compl. (#86) at ¶ 31). The FSA adopted the recommendation of the Japanese Securities and Exchange Surveillance Commission, which found that MRI International: (1) failed to separately hold investor monies and since at least 2011; (2) commingled those assets with MRI's own monies; (3) used investor monies to pay dividends to other investors; (4) made false statements to FSA during its regulatory investigation; (5) developed plans to continue soliciting new investors in 2013, knowing MRI International could not satisfy its outstanding obligations. ( Id. )

In revoking MRI's license, the FSA directed MRI to: (1) give proper explanations to customers about the administrative action; (2) immediately assess the customers' status and the status concerning the use and management of assets invested by the customers and regarding other necessary matters; (3) formulate a plan to repay the investors and implement the plan immediately; (4) take every step to protect customers; (5) stop improperly spending the company assets; and, (6) submit status reports regarding the above responses and implementations. ( Id. ); ( see also Amend. Mot. for Prelim. Injunc. (#8) at Ex. 5).

Thereafter, the U.S. Security and Exchange Commission filed a civil enforcement action against MRI International, Edwin Fujinaga, and CSA Service Center LLC. See SEC v. Fujinaga, et al., No. 13cv-01658-JCM-CWH (D. Nev. Sept. 11, 2013).

II. The Discovery Stay

On July 5, 2013, class-action Plaintiffs filed suit under the Securities Act of 1933, the Securities Exchange Act of 1934, and various Nevada state laws. (Compl. (#1) at 10-19). On the same day, Plaintiffs also moved for a preliminary injunction to freeze Defendants assets and expedite discovery. (Mot. for Prelim. Injunc. (#5) at 13).

On September 13, 2013, U.S. District Judge Howard D. McKibben granted Plaintiffs' motion for a preliminary injunction and determined that Plaintiffs face an "immediate and irreparable harm" because there is "cause to believe that MRI has violated [an] SEC[] order by destroying documents in direct contravention of its order." ( Id. at 12:18-19). Accordingly, the court ordered expedited discovery for ninety days, stating "discovery shall include but not be limited to" the following five categories:

1. Determining the location and amount of assets held by MRI, Fujinaga as officer of MRI, or Sterling Escrow, in their names or in which they have a beneficial interest, including accounting records in both paper and electronic form, such as financial statements, general ledgers, and check registers reflecting all receipts and disbursements of assets by MRI during that period;
2. Determining whether assets of MRI are being converted from MRI to any other person or entity;
3. Discovery from MRI's bank or banks in which plaintiffs deposited their money;
4. Ascertaining whether MRI or Fujinaga as officer of MRI have solicited or consummated any investment contracts following the Japanese ...

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